SaaS Pricing: Decoding Assistly's Freemium Strategy

Published on 28 July 2011

With its tiered pay-as-you-go pricing model, the SaaS model was considered revolutionary when it was first announced. However, it looks like the model might undergo yet another iteration. SaaS help desk provider Assistly's announced major changes to its pricing strategy yesterday. The company has opted for a SaaS Freemium approach in the truest sense of the word. This means they have done away with pricing tiers. Instead, all customers get a free seat, an a la carte offering of their "flex hours" program, and free support hours in exchange for extensive use of the product.

In this post, let's see why Assistly's strategy might disrupt SaaS pricing and how it could affect your small business.

Will it work?

Assistly states that the pricing model was changed after six months of extensive research and customer surveys. According to Matt Trifiro, senior vice president of marketing at the company, they found that customers did not want to be "burdened" with figuring out pricing models and buckets. The result, says Trifiro, was that Assistly did away with buckets entirely. To understand the full implications of Assistly's move, consider that the tiered model is an industry standard: it is tried-and-tested and customers and vendors are used to it.

SaaS pricing expert Lincoln Murphy of Sixteen Ventures says the company seems to have confused communications about pricing with the pricing model itself. "Customers already understand the value they are going to get from your product," he says. "Price objections are eventually value objections." This means that customers should be educated about the benefits of using a particular SaaS product. As an explanation, he points to his theory of benefits of benefits. This means, he says, the SaaS provider has to understand the benefit that customers derive from the benefits or features the provider gives them.

Assistly disagrees that they confused communications with pricing. "We had a great deal of success with our tiered pricing model," says Trifiro. "But customers told us they didn't like tiered pricing-not ours, not anybody's-so we saw that as an opportunity to do something different." Assistly's research uncovered a new finding: small- and mid-sized businesses disliked tiered pricing models, but suffered through them because they didn't see alternatives. "Today's businesses want to buy SaaS services like they buy apps in the Apps Store," says Trifiro, "We saw an opportunity to simplify our pricing and drive customer satisfaction through the roof."

But, is the price disruption a good deal for small businesses?

The answer is a complicated one. This is because the mechanics of software purchase and adoption are complicated. For example, consider the matrix of decision points in a large corporation with a big budget. Among other things, software purchase is a function of features, price, preferred vendors, scalability across multiple business units, and maintenance costs. The cheapest solution, in this case, may not always be the best one.

On the other hand, price trumps all other factors in a small business or scrappy startups with limited budgets. "I have to look at my numbers in the end," says Graham Murphy, senior vice president of community development at Grooveshark, an online music service. The purchase decision is often a tradeoff between necessary features and price. This means that bells and whistles and enhancements (or, the enterprise bucket in tiered SaaS models) are often sacrificed for a cheaper bargain.

Wait, it gets even more complicated..

Grooveshark, which is one of Assistly's earliest customers, and uses 18 seats from the company, uses approximately ten SaaS applications. "Very few of these applications are premium," says Murphy. He says they were "thrilled" with the new pricing model for Assistly. The impact for a company with two seats, he says, would be even greater because, effectively, the company would end up paying for just a single seat. I asked him if price was a consideration in their choice of Salesforce.com - a premium application used by their company - as well."In addition to price, we researched features and competition and decided to go in for the service," says Murphy.

Part of the mystery of features versus price is unlocked by Murphy from Sixteen ventures. He says that uniform pricing is the norm in products with horizontal features (or products that blend multiple services such as CRM and project management together). "If you have a niche product, then tiered pricing is the best way to go," he says. So, if you are a small business in need of a web-based CRM application, chances are that your world is not changing anytime soon.

"There's nothing fundamentally wrong with the tiered pricing," says Trifiro, "but we saw an opportunity to optimize customer satisfaction." Assistly sees their pricing model as an investment in long term revenue. "If I can make it easier for companies to make the decision to use Assistly, then I am willing to take a short-term revenue hit. I can increase my revenue over the long term through retention and lifetime value. That's win-win."

It's a new world

Assistly, of course, has disrupted the tier rule in their product category.

"Tier-based pricing is too rigid because you penalize a customer for moving between tiers," says Trifiro. This means that if a customer wants just one feature from another tier, he has to shell out the full-price for that tier. "We don't want to align our price to a customer's pain threshold," says Trifiro.

That pick-n-choose model instantly made me think of a supermarket aisle of software features. You load your software cart with features that are necessary and pay at the company counter. Trifiro was quick on the uptake. "We are like Costco," he says. "We offer the best product with the best deal."

Parallels with Costco apart, Murphy from Sixteen Ventures says branded technology should not dictate small business product choices. "There are lots of solutions out there beyond the branded ones and customers should make sure that they know what they want from a product," he says. However, despite his reservations, he concedes that Assistly's pricing model is disruptive. "And, that (the disruption) is awesome," he says.

It is too early to tell whether that disruption will succeed or dissipate into the mists of experimentation.

However, the die has been cast. Or, as Trifiro puts it: "It's a new world now."